TIGTA: IRS enforcement efforts pay off

The Internal Revenue Service expanded its compliance activities by 9 percent in fiscal 2007 compared with the previous year and collected 22 percent more revenue at $59.2 billion, the Treasury Inspector General for Tax Administration said in a report released April 28. The IRS has reversed many of its enforcement declines, according to the report. The number of examinations of individual income tax returns has steadily increased since 2000. The IRS examined 1,384,563 returns, or one in every 97, in 2007, TIGTA said.

Improving compliance is crucial in reducing the tax gap and maintaining the integrity of the voluntary tax compliance system, said J. Russell George, the Treasury Departments IG for tax administration.

Managements emphasis on the collection and examination functions, including re-engineering and organizational changes, could account for some of the positive changes, he said.

 Mary Mosquera

The Internal Revenue Service is trying to determine the most effective method to increase the number of taxpayers who file their returns electronically.

Although the number of taxpayers who submit returns electronically grows each year, the increases are small, said David Williams, director of the IRS’ Electronic Tax Administration and Refundable Credits Office.

This year, e-filing grew to 62 percent of total returns from 58 percent last year. Congress originally wanted the agency to reach 80 percent by this year but has extended that target to 2012.

The IRS has considered several measures that might motivate more taxpayers to file their returns electronically, and the agency will release part of a study on those ideas later this month, Williams said. The Senate Appropriations Committee directed the IRS to create a report on proposals to advance e-filing.

“IRS is not taking a policy position for or against any one of them,” Williams said at an event May 1 for tax professionals, sponsored by the Council for Electronic Revenue Communication Advancement (CERCA). “We’re trying to make sure we have an objective picture.”

The service is considering measures such as:

Using a PDF version of a tax form that a taxpayer could fill in and submit electronically.

Using a bar code to scan information submitted on paper.

Resurrecting the telefile program.

Establishing incentives for taxpayers.

Some lawmakers support using a Web portal that lets taxpayers directly file their returns without charge. The IRS is evaluating other methods that states use for their income taxes and approaches that foreign governments use.

The second part of the report will include analyses of technological requirements and costs and legislation needed for the proposals, Williams said. The agency has not announced when it plans to release the second part.

Most professional tax preparers e-file their clients’ returns, and taxpayers with incomes of as much as $54,000 — 70 percent of taxpayers — are eligible to e-file at no cost by using software provided by companies in the IRS-sponsored Free File Alliance. Other taxpayers must pay a software company or designated transmitter to submit their return electronically.

The IRS wants to motivate people who have resisted e-filing to change. They are primarily taxpayers who avoid fees by preparing their returns with commercial tax preparation software, printing the returns and sending the paper versions to the IRS, Williams said. Some professional tax preparers also do not e-file, he said.

Two economists provided data at the CERCA event from a study they conducted for the Computer and Communications Industry Association (CCIA), a trade group. The study was on the benefits and costs of an Internet filing system, or I-File, for which the IRS would provide an online e-filing site for taxpayers. “It seems like a no-brainer that the IRS site should let taxpayers file for free. But what is the benefit?”asked Robert Litan, senior fellow of economic studies and global economics programs at the Brookings Institution and vice president of research and policy at the Kauffman Foundation. He is one of the study’s authors.

About one-third of individual and professional taxpayers prefer to submit paper returns even though they could file electronically, Litan said. They might not be comfortable with e-filing, he added.

According to the CCIA study, it would cost the IRS $105 million over three years to fully implement the system for the 2011 tax year and $25.2 million thereafter to maintain it, said Jeffrey Eisenach, chairman of Criterion Economics and adjunct professor at George Mason University School of Law. He is the study’s other author.

“You can’t justify this program just based on the potential increase in e-filing,” he said. Based on the economists’ assumptions, the online filing system would cost at least $132 million more than it would save in the first decade, Eisenach said.

Policy-makers should focus on improving the commercial options that the IRS could implement at lower or no cost, Litan said.

“If government wants to increase e-filing, it could mandate it for tax preparers,” he said. “That would get it over the 80 percent goal.”

The Free File Alliance also could expand its services. Legislation introduced recently proposes that electronic versions of popular tax forms should be available to all taxpayers at no cost through the Free File program, the study states.

Nina Olson, the IRS’ national taxpayer advocate, said the agency needs to better serve the 30 percent of taxpayers who are not eligible for Free File.

“It’s the government’s obligation to offer something to its taxpayers, and what is the least costly way to offer it and how do we deliver it — in partnership with the private sector or licensing the private sector?” Olson asked.

She recommended a templates model, which would allow taxpayers to look up instructions and publications and electronically file their tax return as a PDF form. The system would lack the features of e-file, but it would be free to taxpayers and allow them to bypass third-party software providers to file electronically.

“It may only attract 5 mil ion filers, but that 5 million might not be captured elsewhere,” Olson said.